Banks remain rather cautious in providing loans to the industry due to the large number of insolvencies and generally volatile market demand situation.
The volume of construction work decreased 10.3% year-on-year between January and October 2017 – a decline mainly caused by poor financing of infrastructure works. At the same time growth of private investments in the residential and commercial sector (retail and offices) has continued to support activity in the industry, which is expected to record 2.2% value added growth in 2018.
Investment in public construction is still insufficient given the overall market potential, mainly hampered by underfunding of local infrastructure. This also constrains a potential surge in commercial construction activities, while residential construction remains positive, partly compensating the reduction in engineering and non-residential work. In the construction materials subsector many companies generate only small profit margins while there is a need to provide high quality products and services in order to expand the business.
Due to the current lack of government investments/projects competition has become fiercer. However, a number of construction companies that typically focus on public projects are offseting the reduction with residential and commercial projects.
Many construction businesses are heavily indebteded., The main financing sources are suppliers and banks. However, banks are rather cautious in providing loans to the industry due to the large number of insolvencies and generally volatile market demand situation.
Payment duration in the industry is 90-120 days, on average, and the level of protracted payments remains high. As construction projects usually take an extended amount of time to be completed, buyers rely heavily on protracted payments, which is increasing the risk in the value chain. At the same time public bodies are paying slower than private companies.
In H1 of 2017 construction insolvencies increased 6% year-on-year, accounting for 17% of all business failures in Romania. It is expected that there will be no major construction insolvency increase in 2018, however this depends on a stable economic environment with no major decrease in government investments.
Due to high risk and elevated insolvency numbers our underwriting stance remains restrictive for all construction subsectors. For larger requests we require constantly updated financial information and payment experience. In the public construction segment the state is generally slow to pay for completed work, which is putting pressure on the liquidity of related buyers. Therefore we take extra care reviewing the financing conditions of public projects.